Governors & Mayors, America’s Biggest Suckers !

Business Loves Government Hand-HoldingEveryone from high-tech manufacturers to sports-team owners wring subsidies out of local politicians.Bloomberg, July 31, 2017

America’s titans of industry and finance work hard to convince us that they are masters of their fate, unbeholden to anyone or anything aside from the profit motive and whatever serves the greater good of business and free enterprise.

If only it were so, because the reality is that too many of them are afraid of undertaking new ventures without government holding their hand for reassurance, tax abatements, loans, subsidies or — in some instances — all of the above.

Last week, was a case in point: Wisconsin, a state controlled by that patron of free markets otherwise known as the Republican Party, announced a deal with FoxconnTechnology Co. to give $3 billion in incentives for the Taiwanese manufacturer of iPhones to build a flat-panel TV factory within its borders. In exchange, Wisconsin got . . . well, some nice words.

“Just this past year, Foxconn is reported to have pledged investments of $5 billion in India; $3.65 billion in Kunshan, China; and $8.8 billion in Guangzhou. It’s too early to know if those sums will ever be spent, but including Wisconsin, the tally now stands at $27.5 billion of commitments. That’s more than Hon Hai (the company’s publicly traded flagship) has spent in the last 23 years.”

Those promises are mostly that and little more. At best, this is a wildly optimistic hope for new jobs in an era when U.S. manufacturing employment been in long-term decline. At worse, it is a giant grift, a taxpayer-funded photo op that will yield little in terms of job gains, other than a few hundred heavily subsidized positions.

How subsidized? Well, if the 3,000 jobs come to fruition, that works out to about $1 million per job. The company said it may eventually employ 13,000 people, though that seems like a very optimistic figure. Looking at other LCD factories for guidance isn’t encouraging. They are heavily automated, relying for most manufacturing processes on robots. This suggests that if the $10 billion investment that Foxconn promised comes to pass, a lot of it will be in machines, not people.

But if you were a company looking to build a plant somewhere you’d be a fool not to play governors, mayors and other local elected officials against one another: All you have to do is promise to build a new (fill in the blank) that will generate thousands of jobs. You will be showered with incentives ranging from low-cost loans to tax abatements to regulatory waivers.

It is an unfair fight pitting naive local politicians facing re-election versus the experience of corporate executives, and their teams of lawyers, analysts and accountants. They dangle the very persuasive carrot of new economic development. It is the classic agency problem writ large. Taxpayers never stand a chance.

The worst part is the money localities spend on incentives are real, while the future gains from investments are insubstantial. Worse still, there is no enforcement mechanism to ensure companies honor their promises or refund the cash from their tax abatements when they fail to come through.

We see this time and again, and not just for factories.

Some years ago, Swiss bank UBS AG managed to extract subsidies from the state of Connecticut to build an enormous trading floor in Stamford. The timing was inauspicious, taking place just as technology was replacing human traders with algos. The trading floor now sits empty.

We see similar things with taxpayer-funded subsidies for skyscrapers, new luxury co-op buildings, even prisons. And why does hedge fund Bridgewater Associates need a tax giveaway? It earned $5 billion for clients last year and founder Ray Dalio’s annual compensation is measured in the billions of dollars. But still, it got $22 million in tax breaks if it promised to add jobs in Connecticut.

Yet these are almost nothing compared with the egregious giveaways to billionaires who promise to keep their sports teams in town in exchange for taxpayer-funded stadiums. These are almost uniformly terrible deals 1 . As The Week reported: “Taxpayers cover, on average, 78 percent of the cost of stadium constructions, even as the NFL rakes in $13 billion a year and team owners typically maintain their own sources of independent wealth.” Why are taxpayers subsidizing the hobbies and businesses of fabulously wealthy team owners? There is never a good or satisfying answer.

Which brings us to the National Governors Association and the Conference of Mayors: an online database lets them compare and contrast incentives. But I sometimes wonder if they even talk to each other when they get together in their regular conferences and seminars. Haven’t they figured out that they’re being played for suckers? It often seems like a race to see who can sign the most expensive bad deal on behalf of the taxpayer. It is almost enough to make a free-marketer vote in local elections. Ultimately, these giveaways lead to tax increases for everyone.